Interest rates on rise again

The Reserve Bank has hiked interest rates for the eleventh time in a year, announcing a short time ago that the cash rate would rise by another 0.25 per cent to 3.85 per cent.

May 02, 2023, updated May 02, 2023
Photo: AAP

Photo: AAP

Despite predictions that the Reserve Bank board would leave the rate at 3.6 per cent as it did with April’s pause, it resumed a policy of increases to tackle a stubbornly high inflation rate.

Today’s increase follows still-high inflation data that, while easing, was not enough to convince the board to keep the cash rate on hold for the second month in a row.

The increase brings the cash rate to its highest level since April 2012.

“Inflation in Australia has passed its peak, but at seven per cent is still too high and it will be some time yet before it is back in the target range,” RBA Governor Philip Lowe said.

“Given the importance of returning inflation to target within a reasonable timeframe, the board judged that a further increase in interest rates was warranted today.”

Further tightening has not been ruled out.

“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve,” Lowe said.

The news will come as a blow to mortgage holders, who endured 10 straight rate hikes since May 2022 and had hoped that April’s pause signalled an end to the trend that had added hundreds of dollars to the monthly costs of servicing a home loan.

The latest increase will add $1051 to monthly repayments (compared to April 2022 levels) on a $500,000 loan with 30 years remaining on the term.

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But Lowe had warned that after the last 25 basis points cash rate rise in March, more rises could be expected.

“The board expects that further tightening of monetary policy will be needed to ensure that inflation returns to target and that this period of high inflation is only temporary,” he said at the time.

The Reserve Bank is determined to put a lid on household spending in order to rein in inflation to its target rate of two to three per cent. In December, inflation hit an annual rate of 7.8 per cent – the highest level since 1990.

But a drop in March quarter inflation to 7 per cent gave hope that the increases had taken effect and the Reserve Bank would pause further to gauge the impact of increases so far.

Before this afternoon’s decision, banks and analysts were divided on which way it would go.

Three of the big four banks expected the cash rate to stay at 3.6 per cent in May, with neither Westpac nor NAB anticipating further increases.

But CBA economists predicted one more hike today, while ANZ predicts one final lift in August.

Australian National University economists had tipped another 0.25 percentage point hike today was likely, despite uncertainty following surprising upbeat jobs data and signs of resilience among businesses and consumers.

-with AAP

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